2-16-16 – Where is the market going?

Stocks opened broadly higher after the three-day weekend and are holding most of the gains into midday Tuesday. The S&P 500 is up 20.92 points to 1885.70 and 2 points from session highs.

Nine of ten market sectors are helping, led by advances in Consumer Discretionary (XLY), Industrials (XLI), and Technology (XLK).

The Energy (XLE) sector, however, has erased early gains amid ongoing volatility in crude oil. Prices rose yesterday on reports that Saudi and Russian officials had outlined plans for production cuts, but crude is lower today on concerns that Iran is not on board with the notion of changes to output. Oil was recently down 35c to $29 after a spike to $31.50 per barrel earlier today.

Gold is giving back some of its “safety bid” as the buck strengthens for a second day. The yellow metal lost $25 to $1314 Tuesday.

Treasury bonds are also lower for a second day, but seem to find some support from dismal readings from the NY Empire State Manufacturing Index (-16.6 for Feb vs. -9.9 consensus) and NAHB Housing Index (58 for Feb vs. 60 consensus). The yield on the benchmark ten-year sits at 1.78%, up from the dramatic 52-week lows of less than 1.6% Thursday.

On the options front, CBOE Volatility Index (.VIX) is off .80 to 24.60 on a day of light volumes. Roughly 3.7M calls and 3.1M puts traded through the first two hours. Projected volume for the day is 15.5M and nearly 20% below the one-month daily average. USO Oil Fund (USO) Feb 9 calls, VIX Feb 29 calls, and SPDR 500 Trust (SPY) Feb 185 puts are the most actives.

From a technical perspective, the key recent event was Thursday’s dramatic rally off intraday lows. Recall that the S&P 500 had fallen to within two points of its January 20 lows before rallying Thursday afternoon and into Friday. The gains into the weekend set a positive tone for overseas markets on Monday.

Indeed, Japan’s Nikkei surged 7.2% yesterday driven by the weaker yen and a report on fourth quarter GDP. Europe was broadly higher Monday as well and China’s equities rallied 3.1% today.

Despite the large percentage gains at home and abroad, the S&P 500 is in the midst of a counter-rally during a downtrend (while gold and Treasuries are retracing recent gains). Today’s highs around 1887 coincided with a support/resistance level from September. Beyond that, the 1900 level comes into play. On the downside, the S&P 500 seems likely to fill the gap left on the daily chart (i.e. move lower) over the next few days and test support around the 1865-67 level. Beyond that, the next support levels are at 1850 and 1830.

Crude oil remains an important catalyst in the short-term. Inflation and Housing data tomorrow morning might have some market moving potential, but keep an eye on those FOMC minutes tomorrow afternoon for the potential to stir up bonds, the buck and gold prices as well. Also remember that Friday is a monthly expiration for February options.